New Shari’ah green tech bonds to attract Muslim investment

A new type of financing has been developed to encourage millions of pounds worth of long-term investment in green technology, in particular from the Islamic community.

Hundreds of billions of pounds worth of investment in green technology is required around the world to create the low carbon future. However, many projects are unattractive to some investors because of their long-term nature.

Also, Shari’ah law forbids the lending of money for gain, yet many green energy projects are required in Islamic nations, such as Saudi Arabia, and yet there is a surplus of cash held in the Muslim world waiting to be utilised.

All three challenges are being tackled by the development of a type of bond called Green Suduk Climate Bonds.

The Climate Bonds Initiative, the Clean Energy Business Council of the Middle East and North Africa and The Gulf Bond and Sukuk Association are today launching a Green Sukuk Working Group, which will use market expertise to promote the issuance of sukuk for the financing of climate change investments and projects, such as renewable energy projects.

The Working Group is inviting participation from other organisations interested in the potential of green sukuk financing.

Suduk are financial certificates, or the Islamic equivalent of bonds, which are structured to comply with Shari’ah Islamic law, which prohibits the charging, or paying of interest.

To give an idea of the potential, Standard & Poor estimates that 20% of banking customers in the Persian Gulf and Asia would now choose an Islamic financial product over a conventional one with a similar risk-return profile.

Because the lending of money in Islamic culture has a moral dimension, rather than a financial one, then there is a good fit with the ethical aspect of green financing.

Aaron Bielenberg of the Clean Energy Business Council, a non-profit, non-governmental association established in Masdar City, Abu Dhabi, said that projects in the region are desperate for finance.

“There is a significant and growing number of projects, for example renewable energy in the Middle East, that are ideally suited to sukuk investors," he said. "This group will help investors more easily identify Shari’ah compliant, clean energy investment opportunities.”

Nick Silver of the Climate Bonds Initiative, has identified an urgent need for it in order to "mobilize finance for both renewable energy and climate adaptation projects in both the Middle East and in other developing Muslim countries such as Bangladesh and Pakistan".

That there is capital seeking investment is confirmed by Farmida Bi, a partner at the Norton Rose law firm in London: "Banks need more high-grade paper (sukuk) to place their money in, but there is hardly any,” he says.

“There is a lot of pent up demand (for sukuk)," agrees Mohammed Dawood, the head of capital markets at HSBC Amanah, the bank’s Islamic arm.

Michael Grifferty of the Gulf Bond and Sukuk Association says this means the time is right for the launch: “Interest in both Shari’ah compliant and ethical investing is on the rise. Green sukuk can support this trend by expanding the range of available financial instruments. They also support national development strategies by offering longer term finance for essential infrastructure.”

Issuance of Islamic bonds, or sukuk, had a record year in 2011. This year looks set to be even better. In January, the biggest-ever sukuk from Saudi Arabia, and the first government-backed sukuk was struck: a SAR15 billion ($4 billion) 10-year deal for the General Authority for Civil Aviation, led by HSBC Saudi Arabia.

Climate Bond Standard

The scientific and technical aspects of the project eligibility criteria are derived from the International Climate Bond Standards scheme and developed with the help of International Finance Corporation (IFC), Standard & Poor’s, Aviva Investors and KPMG.

Last November, Greg Barker, Minister of State for Energy and Climate Change, led the launch of a prototype Climate Bond Standard, where he said that "the capital markets have a vital role to play in tacking climate change by meeting the financial challenge. Here in London we are well placed, if we can’t crack it – then who can?”

This first Standard is a screening tool for investors and governments to support investment in delivering a Low Carbon Economy and allows the certification of project development, corporate and other bonds linked to or backed by wind energy assets.

It is backed by a group of leading global institutional investors and environmental Non-Government Organisations, from America and Britain, including the US Natural Resources Defense Council, the California State Treasurers’ Office, the Investor Group on Climate Change (IGCC), the Carbon Disclosure Project, and the Ceres Investor Network on Climate Risk (INCR).

The Climate Bonds Initiative is an investor-focused not-for-profit organisation that promotes large-scale investment in the low-carbon economy.

It has identified many other types of bond besides the green sukuk, including:

• Index-linked bonds tied to inflation rates or carbon prices. For example, Climate Bonds could be issued with a low base rate of interest, but have bonus payments if carbon prices reach certain higher levels
• Carbon price floor bonds where the interest rate payable goes up if the carbon price does not meet stated targets
• Zero-coupon bonds that pay out a guaranteed rate upon maturity, whether 10, 20 or 30 years in the future.
• Convertible bonds which allow investors to convert their bonds to equity stakes at agreed points in the development
• Regulated Covered Bonds which provide guaranteed revenue streams from energy generation projects that qualify for feed-in tariffs that are used as collateral for AAA bonds; these are modelled on Germany’s 300 year-old Pfandbrief ‘covered bond’ property market.

To pay for renewable energy generation projects, project developers combine investor equity with money borrowed from banks acting for the bond-issuing intermediary.

Let's run the banks like e-Bay and Wikipedia

Let’s not despair that human nature always causes ruin just because the banks are collapsing. Individuals can make a fantastic difference, and together, given a leap of imagination, can find a solution to global financial inequality in an unexpected place.

In a week when capitalism's Goliaths have fallen so swiftly, not by the action of many Davids, but because they were made rotten to the core by their own rapacity, I have been gleaning potential solutions to some of the world's most pressing economic problems from a quite different quarter.

I am researching a book on links between individual and communities in Africa and Wales. This means I am travelling around Wales talking to people who are changing the lives of others thousands of miles away, and whose lives themselves are being transformed in the process. Individuals like Angela Gorman, who, just because she saw a BBC documentary in 2005 about women dying in Chad during childbirth for want of a simple and cheap compound, has given up her job to raise money to help them, and as a result slashed the mortality rate from 17% to under 2.5%, exceeding a Millennium Development Goal. These drugs cost just 60p a pop, and a woman would need five to seven of them. Yet they had, until her straightforward intervention, been dying by the hundred. In short she has achieved in a year what the United Nations failed to, so much so that they have asked her to repeat her success in neighbouring Liberia. [http://www.hopeforgracekodindo.org/]

On Wednesday I met Denise Lord from Pen-y-Craig, in the Rhondda, an ex-coal-mining area classed as 'deprived' in the lexicon of EU or government grant-dispersing bodies, and which has had millions poured into it in an attempt to help its children. Although Denise says the kids she runs workshops for are "materially rich, with their mobile phones and Sky boxes" compared to those she has visited in the slums of Cape Town, the problem is that compared to the Cape Town kids they are "spiritually poor, while the Cape Town kids are spiritually rich and materially poor". [http://www.valleyskids.org/news_details-13198.html]

I asked her to explain. "We have so much to learn from these people," she replied, "And I think among the most important is humility. The kids there have to struggle to get to school so they value it. The kids here take it for granted, so they don't. They bunk off and think it's cool to drop out and get into trouble."

'We have so much to learn from these people' is a phrase I've heard from every one of these extraordinary-yet-ordinary individuals I have talked to so far. But Martha Musonza Holman is one apart. She left her two sons, aged 9 and 12, behind when she fled Zimbabwe in 2001 to come to Wales, where she now resides running a fair trade business called, appropriately, I Love Zimbabwe [http://ilovezimbabwe.co.uk]. She and her partner David struggle to import crafts made by people from her community back there to sell here, so she can send the profit back.

It might be easier to trade in hedge funds. To start with she has to contend with officials in Zimbabwe who demand a cut which puts the price up. "You may think they're corrupt," she says, "like some financial traders. But they're just trying to survive themselves in the worst of economic conditions. However we have a consignment of ceramics that has been sitting in a port for three months and we can't bring it here to sell."

The bankers on Wall Street and in the City, who paid themselves billions of dollars in bonuses, don't have the excuse that they were just trying to survive.

"The last consignment we received cost us £1130 to bring here, but I can only sell it for £1200," she complains. Furthermore, sometimes she sits in the Abergavenny market all day and sells nothing. "People in Zimbabwe think it's simple. We are all rich in the West, they believe, so it's easy for me to sell their crafts. But it is not!" The market decides what sells. If no one buys, or if the profit is miserable, her people back home will starve, fair trade or not.

Here is a clear case where the market needs intervention, to help the poorest. That is exactly why the Welsh Assembly Government has commissioned me to write this book and help Martha and all the others to find a bigger market.

Fair Trade is about transparency. Those who pay can see, should they choose, that their money benefits the community where the producers live, and that the producers receive a fair wage. Should not all trade be fair? Should not all banks be transparent? Why do we expect one system to apply to one type of financial transaction, and another, of supposedly far greater import, to be shrouded in secrecy and occluded by hopelessly obscure rules?

The few exceptional people I am meeting are passionate, inspirational, hard-working and often unpaid, as they try in every way they can to help people so far away. Why do they do it? Because their own spirits are enriched and their lives gain meaning by doing so - without the need for religion.

I struggle to understand human nature when I compare their generosity to the insatiable greed of the equally exceptional few bankers who have sucked dry the trough that millions, also far away, are now unable to feed from.

So what is the solution I am advocating, besides transparency, fairness and humility? I believe that it is glaringly obvious. It's a solution dreamed up by ordinary people and millions use it every day. It is a model which others have proselytised for other spheres of human endeavour but few have dared suggest could equally apply to the financial world. When I suggest it you will doubtless laugh. You will snort. But after you've done that, consider it further with me.

We all know that a lack of regulation has brought the crisis upon us. We all know that this has encouraged human greed. I believe that particular aspects of human nature, multifarious as it is, are manifested in different environments purely as a result of what is acceptable in that environment. If you approve excess, excess is what you get. If you reward honesty, then that is what you get.

Every day, millions of people use e-Bay and Amazon and other online marketplaces, buying and selling to other invisible individuals whom they will never meet. They do so with trust and faith because they can clearly see their trading history. Bad deals get bad feedback, and we can all read it. Yes, sometimes scams occur, and sometimes people get ripped off because they don't bother to check the trader's history. But compared to the majority of transactions these are rare.

If, thirty years ago, I had told you that in the future people would trade to this extent with others whom they would never meet and, by and large, have faith that they would not be defrauded, you would have called me hopelessly idealistic. You would have said that such a thing was only possible in a small community where everyone knew everyone else and the high probability of repercussions for bad behaviour would help to curb it. Yet here we are, and, thanks to simple rules, effective monitoring, and modern technology, it happens all the time and millions of dollars change hands every day.

Furthermore, Credit Unions [http://en.wikipedia.org/wiki/Credit_Unions] and community banks trade cash and help individuals and communities bootstrap themselves up without recourse to high interest rates or rapacious moneylenders. In these constituted environments individuals or groups invest money, and other individuals or enterprises borrow it, in a transparent way. They are owned and controlled by their members. The average U.S. credit union has $93 million in assets versus $1.53 billion in assets for the average U.S. bank, so they are commonly smaller - not a bad thing, since if one fails it is not the end of the world.

So here is my horribly naive, simplistic and obvious solution, in outline, to the problem of global financial ineqality and the dark side of capitalism. Here is my mad plan to render these monstrous predatory dinosaurs of banking and insurance extinct once and for all. Here is the route to allow small and medium sized traders - everyone in the world, eventually - access to capital fairly and in confidence: use modern technology, e-Bay type rules and checks and balances, transparency and fairness, to apply a credit union style model to mutual one-to-one exchanges.

Even if those traders be large concerns, they must still follow the same rules of transparency. Everyone's credit history will be visible to all. And if you can see your own history so plainly, would you not be more prudent yourself?

The same rules would apply to everyone, not one set of rules for us and another for the bankers. As with peer-to-peer networking, file-sharing, and indeed Wikipedia-style collaborations of any sort, we would all be bankers, whether lenders or borrowers. If millions of otherwise unconnected people working together can build something as essential and huge as Wikipedia or e-Bay, why can't they build lending institutions, independent of banks? I am not an accountant, or a banker. I can't work out the nitty-gritty of how it would work. i don't need to. I believe in human nature - someone else will, or a crowd of people working together.

If this were done then maybe, just maybe, we might learn some spiritual wealth and humility; by doing things the slightly harder way - and following some simple rules that we collaborate on to make up.